1st Source Corporation and 1st Source Bank
Corporate Governance Guidelines

I. Introduction

The Board of Directors of 1st Source Corporation, its subsidiaries and affiliates (the "Company"), acting on the recommendation of its Executive and Governance Committee, has developed and adopted these corporate governance principles (the "Guidelines") to promote the functioning of the Board and its committees and to set forth a common set of expectations as to how the Board should perform its functions. These Guidelines apply respectively to 1st Source Corporation and 1st Source Bank. Except where the context otherwise requires, "Board" and "Committee" refers to the board or a committee of the board of each of the holding company and the bank.

II. Board Composition

Size of Board:

The size of the Board should facilitate substantive discussions of the whole Board in which each director can participate meaningfully. From time to time, the Board will determine the appropriate size of the Board to carry out its responsibilities effectively. Although the Board has determined that a Board of nine to eleven may be more appropriate in the long term, it has decided that eleven to fourteen members is the appropriate size for the Board based on the Company’s present circumstances. The Executive and Governance Committee will periodically evaluate whether a larger or smaller slate of directors will be preferable.

The Board should have a significant majority of independent directors. A limit on the number of inside directors has not been established so as to provide the Board flexibility in responding to changing circumstances such as future acquisitions or management succession planning. It is the expectation of the Board that the number of inside directors will be limited.

Membership Criteria:

The composition of the Board should encompass a broad range of skills, expertise, industry and market knowledge and diversity of perspective with all directors having a reputation for integrity. Directors need not be shareholders of the Company but are required to become so upon election to the Board. A majority of the directors shall be citizens of the United States.

Independence Requirement:

A majority of the Board shall consist of directors whom the Board has determined have no relationship that would interfere with the exercise of independent judgment in carrying out responsibilities as a director of the Company and who are otherwise "independent" under the listing standards of the Nasdaq Stock Market.

III. Selection of Chairman of the Board and Chief Executive Officer

The Board may select its Chairman and the Company’s Chief Executive Officer in the manner it considers in the best interests of the Company at any given point in time. These positions may be filled by one individual or by two different individuals.

IV. Selection of Directors

Nominations:

The Nominating Committee is responsible for selecting the nominees for election or re-election to the Company’s Board of Directors. In addition, the Company’s Nominating Committee is responsible for recommending to the Board one or more nominees to fill vacancies occurring between annual meetings of shareholders.

Criteria:

The Nominating Committee should select new or incumbent nominees or recommend to the Board nominees to fill vacancies for the position of director considering the following criteria:

• Requirements of the Company’s By-Laws;
• Current knowledge and contacts in the communities or industries in which the Company does business;
• Personal qualities and characteristics, business experience, accomplishments and reputation in the business community;
• Current knowledge and contacts in the communities or industries in which the Company does business;
• Ability and willingness to commit adequate time to Board and Committee matters;
• The fit of the individual’s skills with those of other directors and potential directors in building a board that is effective and responsive to the needs of the Company; and
• Diversity of viewpoints, background, experience and other demographics.

Invitation:

The invitation to join the Board should be extended by the Board itself via the Chief Executive Officer of the Company and the chairperson of the Nominating Committee.

Orientation and Continuing Education:

Management, working with the Board, will provide an orientation process for new directors, including background material on the Company, its strategic and operating plans, its risk profile, corporate governance, and meetings with senior management. This will occur within three months of being elected to the Board. Periodically, management will provide additional educational sessions for directors on matters relevant to the Company, its strategic and operating plans, its risk profile and corporate governance.

V. Election Term

The Board does not believe it should establish term limits. As an alternative to term limits, the Nominating Committee will review each director’s continuation on the Board in connection with the Committee’s determination whether such director should be nominated for re-election upon expiration of his or her current term. This will allow each director the opportunity to conveniently confirm his or her desire to continue as a member of the Board.

VI. Retirement of Directors

Any director who becomes 70 years of age during his/her term of office shall, prior to the next annual meeting of shareholders, resign his or her position.

In addition, any employee director shall resign from the Board upon his or her resignation, removal or retirement as an employee of the Company. This requirement may be waived by the Board.

In the event that the employment status or health of any director changes from the status held when he or she came on the Board, the Board, through the Nominating Committee, shall review the continued appropriateness of that director’s continued membership on the Board.

VII. Board Meetings

The Board currently plans at least four meetings each year, with further meetings to occur at the discretion of the Board.

The Chairman and Chief Executive Officer will establish the agenda for each Board meeting. Management will seek to provide to all directors an agenda and appropriate material in advance of meetings, although the Board recognizes that this will not always be consistent with the timing of transactions and the operations of the business, and that in certain cases, it may not be possible. Each Board member is free to suggest the inclusion of items on the agenda. Each Board member is free to raise at any Board meeting subjects that are not on the agenda for that meeting. The Board will review the Company’s long-term strategic plan and annual operating plan each year.

Materials presented to the Board or its Committees should be as concise as possible, while still providing the desired information needed for the directors to make an informed judgment.

VIII. Executive Sessions and Lead Director

To ensure free and open discussion and communication among the independent directors of the Board, the independent directors will meet in executive session at least twice per year, with no other directors present. Executive sessions shall be informal sessions for open discussion. Issues raised in executives session may be raised by the independent directors and formally addressed by subsequent board committee action, as appropriate.

Unless otherwise determined by the Board, the incumbent chairman of the Nominating Committee shall serve as "lead director." The lead director will normally chair any meetings of the Board at which the Chairman of the Board is not present or from which, for whatever reason, he has recused himself, and will conduct the executive sessions of the independent directors.

IX. The Committees of the Board

The Company shall have at all times an Audit Committee, an Executive Compensation and Human Resources Committee, a Nominating Committee, and an Executive and Governance Committee. Each of these Committees must have a written charter.

All directors, whether members of a committee or not, are invited to make suggestions to a committee chairperson for additions to the agenda of his or her committee or to request that an item from a committee agenda be considered by the Board. Each committee will determine which members of management will attend committee meetings and when to conduct meetings or executive sessions without management. Each committee chairperson or his designee will give a report of his or her committee’s activities at the Board meeting next following the date of a committee meeting.

Each of the Nominating Committee, the Audit Committee, and the Executive Compensation and Human Resources Committee shall be composed entirely of directors whom the Board has determined have no material relationship with the Company that might impair their independent judgment and who are otherwise "independent" under the applicable listing standards of the Nasdaq Stock Market. Any required qualifications for the members of each committee shall be set out in the respective committees’ charters. A director may serve on more than one committee for which he or she qualifies. The Board will determine membership on each committee. It is the sense of the Board that directors should serve on committees for multiple years in order to develop an understanding of the issues that come before a committee. While consideration should be given to rotating committee members periodically, the Board does not feel that rotation should be mandated as a policy.

The Board may, from time to time, establish or maintain additional committees as necessary or appropriate. Currently, the Bank Board maintains three committees in addition to the committees discussed above. These are the Loan and Funds Management Committee, the Specialty Finance Credit Committee, and the Trust and Investment Committee.

X. Succession Planning / Management Development

The Chief Executive Officer will review annually with the Executive Compensation and Human Resources Committee on succession planning and the Company’s program for management development. The Executive Compensation and Human Resources Committee, in turn, reviews these discussions with the Board as a whole.

XI. Executive Compensation

Evaluating and Approving Compensation for the Chief Executive Officer

The Executive Compensation and Human Resources Committee shall annually evaluate the performance of the Chief Executive Officer against the Company’s goals and objectives and approve the compensation level of the Chief Executive Officer.

Evaluating and Approving the Compensation of Management

The Executive Compensation and Human Resources Committee shall evaluate and approve the overall compensation of and policies applicable to executive officers.

The Executive Compensation and Human Resources Committee may retain compensation consultants or other experts to assist the Committee in the performance of these responsibilities.

XII. Director Compensation

The form and amount of director compensation, including director attendance and meeting fees, will be determined by the Board from time-to-time after review of recommendations from the Executive and Governance Committee.

XIII. Expectations of Directors

The business and affairs of the Company shall be managed under the direction of the Board in accordance with Indiana law. In performing their duties, the primary responsibility of the directors is to exercise their business judgment in the best interests of the Company. The Board has developed a number of specific expectations of directors to promote the discharge of this responsibility and the efficient conduct of the Board’s business.

1. Commitment and attendance. Directors are expected to attend and should make every effort to attend meetings of the Board, the annual meeting of shareholders, and meetings of the Committees of which they are members. Members may attend by telephone to mitigate scheduling conflicts. The Company will report in its annual Proxy the number of directors who attended the prior year’s annual meeting of shareholders and any director attending fewer than 75% of his or her board and committee meetings.
2. Participation in meetings. Each director should be sufficiently familiar with the business of the Company, including its financial statements and capital structure, and the risks and competition it faces, to facilitate active and effective participation in the deliberations of the Board and of each Committee on which he or she serves. Upon request, management will make appropriate personnel available to answer any questions a director may have about any aspect of the Company’s business. Directors should also review the materials provided by management and advisors in advance of the meetings of the Board and its Committees and should arrive prepared to discuss the issues presented.
3. Loyalty and Ethics. In their roles as directors, all directors owe a duty of loyalty to the Company. The Company has adopted a Conflicts of Interest Policy. The Policy deals with, among other things, transactions in the securities of the Company, potential conflicts of interest, the taking of corporate opportunities for personal use, and competing with the Company. Directors should be familiar with and must abide by the Policy’s provisions in these areas and should consult with the Company’s counsel in the event of any issues.
4. Other Directorships. The Company values the experience directors bring from other boards on which they serve, but recognizes that those boards may also present demands on a director’s time and availability and may present conflicts or legal issues. Directors should advise the chairperson of the Executive and Governance Committee and the Chief Executive Officer before accepting membership on other boards of directors or other significant commitments involving affiliation with other businesses or governmental units.
5. Contact with Management. All directors are invited to contact the Chief Executive Officer at any time to discuss any aspect of the Company’s business. Directors also have complete access to other members of management. The Board expects that there will be frequent opportunities for directors to meet with the Chief Executive Officer and other members of management in Board and Committee meetings and in other formal or informal settings.
   
   Further, the Board encourages management to, from time to time, bring managers into Board meetings who: (a) can provide additional insight into the items being discussed because of personal involvement and substantial knowledge in those areas, and/or (b) are managers with future potential that the senior management believes should be given exposure to the Board.
6. Contact with Shareholders. Communications to the Board from shareholders are welcomed, including recommendations from shareholders of director candidates. All written communications should be directed to the attention of the chairperson of the Executive and Governance Committee who will either (i) relay a shareholder communication to the full Board or an appropriate Committee chairperson, or (ii) where he/she feels that the communication is not appropriate to relay, at least provide a copy of the communication and an indication of his/her proposed disposition to the General Counsel, or another independent director, either of whom may forward the communication to any other directors if they deem it prudent or appropriate to do so. The chairperson of the Executive and Governance Committee shall forward all recommendations for board nominees submitted by shareholders to the Chair of the Nominating Committee.
   
   In order to give the Nominating Committee adequate time to evaluate recommended director candidates, all such recommendations must be submitted in writing at least 120 days prior to the scheduled date of the next annual meeting of shareholders. Such submissions should include the name of the shareholder submitting the recommendation, the number of shares owned, the name of the record holder or DTC participant through which such shares are owned, if not held of record, and the length of time such shareholder has owned shares of the Company.
7. Contact with Other Constituencies. The Board believes that management should speak for the Company. All inquiries from institutional investors, the press, or customers shall be referred to management through the CEO.
8. Confidentiality. The proceedings and deliberations of the Board and its Committees are confidential. Each director should understand that all materials received for Board discussion or education, are sensitive and are to be kept absolutely confidential. The Board shall maintain the confidentiality and privacy of any information received in connection with his or her service as a director.
9. Share Ownership. The Board believes that directors should be stockholders and have a financial stake in the Company. Share ownership by directors helps to more closely align the economic interests of directors and shareholders. Accordingly, a guideline has been established that directors are expected to own common shares of the Company with a value equal to at least three times their annual directors’ compensation within five years after becoming a director.

XIV. Evaluating Board Performance

The Board, acting through the Executive and Governance Committee, should conduct a self evaluation at least biannually to determine whether it is functioning effectively. The Executive and Governance Committee should periodically consider the mix of skills and experience that directors bring to the Board and assess whether the Board has the necessary tools to perform its oversight function effectively. The Executive and Governance Committee will share its assessment with the Nominating Committee.

Each Committee of the Board should conduct a self-evaluation annually and report the results to the Board, acting through the Executive and Governance Committee. Each Committee’s evaluation must compare the performance of the Committee with the requirements of its written charter, if any.

XV. Reliance on Management and Outside Advice

In performing its functions, the Board is entitled to rely on the advice, reports and opinions of management, counsel, accountants, auditors, and other expert advisors. The Board and each of its Committees shall have the authority to retain and approve the fees and retention terms of its outside advisors. The directors shall also be entitled to have the Company provide reasonable directors’ and officers’ liability insurance on their behalf, to the benefits of indemnification to the fullest extent permitted by law, as well as under the Company’s Articles, Bylaws and any indemnification agreements, and to exculpation as provided by state law and the Company’s Articles.

XVI. Periodic Review of these Guidelines

The operation of the Board is a dynamic and evolving process. As such, these Guidelines are reviewed annually by the Executive and Governance Committee. No policy can cover each and every issue that may surface, but these Guidelines set the proper tone for the operation of the Board and assist the Board in fulfilling its obligations to stockholders and other constituencies.

XVII. Limitation

Nothing in these guidelines intended to alter in any way the standard of conduct that applies to any of the directors under Ind. Code § 23-1-35 or § 28-13-11, as applicable, as amended, and these guidelines do not impose, nor shall they be interpreted to impose any duty on any director greater than, or in addition to, the duties or standard established by such provisions.

February 2006